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POLITICAL ECONOMY ANALYSIS OF THE BINDING CONSTRAINTS TO RENEWABLE ENERGY
INVESTMENT IN GHANA
SIMON BAWAKYILLENUO
RESEARCH FELLOW, ISSER
Theme: “Unlocking investment in Africa’s renewables: what are the binding constraints?”
Wellcome Collection, Euston Road, London 183 Euston Road, NW1 2BE
Thursday 19th January, 2017
OUTLINE
Background to PEA on Binding Constraints to REdevelopment in Ghana
Approaches to the PEA Study
Binding constraints to RE investment in Ghana via PEA
Interventions for change
Conclusions
BACKGROUND TO PEA ON BINDING CONSTRAINTS TO RE DEVELOPMENT IN GHANA
What constraints RE investment in Ghana?
Long list of constraints and related policies
But not all constraints are equally important.
QUESTIONS
What are the binding constraints to investment in RE in Ghana?
Which policies can remove the most binding constraints and are they politically feasible?
What will be the macroeconomic effect of increasing the share of RE and implementing the required policies in Ghana?
Background …
From Growth Diagnostics Framework to GrowthInvestment Diagnostics Framework
“For this particular country, at this particular time, whatis preventing the country from achieving higher sustainedand shared growth?” (Haussmann, Klinger and Wagner,2008: 4).
‘there may be many reasons why an economy does not grow, but each
reason generates a distinctive set of symptoms’ (ibid.: 4).
GIDF:.. for this country, at this particular time, what is preventinghigher levels of investment in a specific RE technology for whichthere is an economic rationale?
Background …
GREEN INVESTMENT DIAGNOSTICS METHODOLOGY
Binding
constraints
Political
economy
analysis
BINDING CONSTRAINTS TO RE INVESTMENT IN GHANA VIA PEA
Fig 1: Identified Binding Constraints to RE investment in Ghana
Source: Pueyo et al. (2016)
APPROACH TO THE PEA STUDY
…a political economy analysis creates the avenue to getbeneath the formal structures in a bid to unearth theunderlying interests, incentives and institutions that foster orfrustrate change (Newell et al., 2014)
… optimal solutions may be unachievable but workable waysforward may nonetheless be found by identifying the sourcesof support for reform and using them as entry points that canunleash an ongoing, virtuous circle of cumulative change (Levy2014).
APPROACH TO THE PEA STUDY
Hybridisation of Schmitz (2012) and Barnett et al., (2016) approaches.
1. Problem
identification
E.g. poor performance in the power sector
2. Diagnosis What features of the political economy generate and
contribute to the persistence of the problem?
3. Prognosis Given the diagnosis, what is the potential for change,
and what are the mostly likely pathways of change?
4. Interventions or
coalitions
How can particular actors help to shift the pattern of
incentives in a manner that promotes desirable change?
Potential Policies Mapping: Policies To Address Constraints and Expected Outcomes
Constraint Policy Expected Outcome
Off-Taker
Risk
Privatisation of the revenue arm of the
power sector.
Achieving an efficient and effective revenue
collection system.
Encouraging private sector participation through
the provision of a reliable repayment
mechanism to power producers.
Improved management of ECG including
revenue collection (especially revenue from
debtors – government and others)
Alternative to privatisation but entails adopting
effective management practices, which improves
overall performance of the off-taker.
Promotion of efficient technical practices
within the distribution arm of the power
sector through privatisation.
Reduction in distribution losses, particularly
non-technical losses.
Establishment of a competitive off-taker
market in the power sector.
Encouraging other mandated institutions such
as mining companies, bulk power producers
and VRA to sign off-taker agreements in other
to promote competition.
Potential Policies Mapping…
Constraint Policy Expected Outcome
Faulty
power
sector
regulation
Establish a full-time high level IPP
facilitator in the power sector.
Promotion of competitive solicitation and
contracting process that is based on
standardised terms, including payment risk
mitigation.
Encouraging transparent auctioning
systems instead of a system based on
unsolicited proposals with projects that
may forever stay in the pipeline.
Establishment of a reliable and
transparent full-cost tariff pricing
system
Ensuring that the automatic price
adjustment formula takes into consideration
several indicators such as the
environmental cost in order to be cost
reflective.
Full Implementation of the RE-Act (Act
832) and its enshrined subsidiary
instruments (Net-metering, mini-grid
systems, and the RE fund and levies)
To guide and track progress of RE
development in the power sector
Lack of
access to
appropriat
e finance
Establishment of RE financial
instruments within domestic banks by
Government with lower interest rates
Opportunity to offer lower interest charges
on loans and to offer long term finance to
investors
OFF-TAKER RISK CONSTRAINT
The present off-taker is unable to maintain a credible financial balance sheet as a result of bottlenecks, making RE investment risky
Potential policies to address this constraint:
1. Privatisation of the revenue arm of the power sector. Implementation limited due to:Fear of high tariffIdeological perspectives of ECG as a
national identityForeign/external driven agendaJob uncertaintyLack of broader consultation
“An important constraint is that theoff-taker is not financially credible.They are unable to pay their bills” (Stakeholder A)).
“In Ghana, we used to be verticallyintegrated and then we went through reform,broke it up into generation, transmission anddistribution. Currently, distribution does twothings. We do distribution and we do supply.Typically, you may want to separate the twofunctions and then for example open thesupply phase up for competition”(Stakeholder B)
…
Fear of high tariff
Ideological perspectives of ECG as a national identity
Foreign/external driven agenda
“The fact is you are bringing a third party,which we see will be more efficient and moreeffective. The fact too, however, is that wealso have information about the cost ofelectricity being higher than how much weare paying and it means that a third partywho is coming in with a business motive orprivate motive will need to break even ormake profit for that matter through high costof electricity tariffs. So, consumers would then
try to fight against those things” (StakeholderE).
“The other argument is alsothat tariffs will go up withprivatisation. This doesn’thappen anywhere. Even in theadvanced countries, tariffs arenot fixed by the operator. Thatis why we have PURC, they areindependent and take certainthing into consideration beforebringing the tariff. So theargument that certain priceswill go up because aconcessionaire is coming in isnot so” (Stakeholder G).
“Ownership should be Ghanaian. It should be listed
on the Ghana Stock Exchange so that every
Ghanaian will be a shareholder. In that way, it will
still be for Ghanaians but it will mean government
cannot take out anything from the ECG.”(I). “So ECG will still be there but it will be a whole new
company who owns the assets within the concession period.
They grant them the access and enter into an agreement on
how they are supposed to operate” (G)
….Unfortunately, the government of Ghana with tacit pressure from MCC of the United States of America, is still pushing this agenda despite all the negative implications for our country and its citizens.”( H).
“Some people ask this question. They think, how will
Americans put in this money if they have no interest?
They think it’s a way of the Americans taking hold of
our power sector” (G).
…
Job uncertainty
Lack of broader consultation
“I think it’s really jobsecurity, first of all.Maybe pride a little bit,but job security andmistrust of whoever iscoming in, that, they aresimply coming to makemoney on top of theirlabour” (F).
“Everywhere you want tointroduce change there isopposition. When we meet ECGand we talk, we say weunderstand because nobodywants it. You know what thesituation is but then we are notsure about what happenstomorrow” (G).
“…why really government choseconcession nobody knows… thathasn’t been made public to useither. It was solely based on theconclusions of IFC or governmenthas further details that we don’tknow. If you ask government youare told they are working with ECGmanagement. Who are the ECGmanagement? The ECGmanagement is government, so ifgovernment appoints the keypersons in ECG and they are part ofthe negotiation to privatise ECG,then it is government negotiatingeverything…” (D).
“I’m sure the news is out there, half information andpeople adding their own stuff… Maybe, people arenot well informed. They don’t know what ishappening. For me, I always use the example of thetelecom. I feel that is the model that we have to use.”(A).
Stakeholders in favour and against potential policy
Support
Oppose
PUWU
PURC
(GOV)
KITEKASA
(CSA) IGGS KfW Dev’t Bank
(FINANCE)
MiDA
Solar Light
(Private)
Privatisation of the revenue arm of the
power sector
AGI
PURC
(GOV)
GIPC
Co
ali
tio
n
Gro
un
d
Alte
rn
ative
in
te
rve
ntio
n
Independence of the ECG devoid of government
interventions
Position on P
olicy In
tervention
IGC
(Academia)
…
2. Improved management of ECG. Implementation limited due to: Powerlessness of government to resist external
pressure associated with financial assistance
Lack of support to create the enabling environment for the policy implementation by government
“When something is coming from outside Ghana weare going to push back easily, good or not. So, whatwould have been nice is for us to recognize that theway we run these parastatals over the years has beenwrong. So we need either a government that is matureenough to step out and say no” (F)
“But the issue is that it’s something the government ofGhana has committed itself to in an internationaltreaty. The MCC Compact II is an international treatygoverned by international law so it supersedes eventhe local laws. It also supersedes the Americans ownlaw. It’s not one way, it supersedes our and theAmerican law because it is an international treaty. Thisis not being pushed because it is an internationaltreaty” (G).
“I will say that the reason why some people are kickingagainst it (privatisation) is because of government.Because they feel that government is the cause of theproblem so don’t blame it on ECG. Government owesECG so much and they feel if government can put inplace measures to curtail this, then ECG can operateefficiently” (A).
“…….The bottom line is that ECG has to berestructured. It has to go through a differentmodel of management to make it moreefficient, for which they can guarantee off-taking of renewable technology” (F).
Stakeholders in favour and against potential policy
Position on P
olicy In
tervention
Support
Oppose
PUWU
PURC
(GOV)
KITE
KASA
(CSA) IGGS
KfW Dev’t Bank
(FINANCE)
MiDA
Solar Light
(Private)
Improve management of ECG including
revenue collection
AGI
PURC
(GOV)
GIPC
Coalition
Ground
Alte
rnative
inte
rve
ntion
Prepaid metering system and independent ECG.
IGC
(Academia)
…
3. Establishment of a competitive off-taker market in the power sector. Implementation limited due to:
Inadequate incentives and resources for its establishment
Lack of political will to drive the processTechnical challenges
“You take a look at the feed in tariff as approved
by the PURC and see whether they can compete
with the conventional system. It is only the biogas
and others that appear to be a bit competitive. So
if the off-taker is given a free will to choose where
he takes his supply from and there is no
compulsion, ideally they won’t go in for
renewables because then, unless they will be able
to sell it on and get their money” (C).
“It depends on how the infrastructure was
built. If for instance Asogli wants to supply
Accra Central, does Asogli need to develop
its own infrastructure? Let’s say I want to be
an off-taker then I need to build my own
system because ECG and Asogli also use
that system. So when the energy goes into it,
I don’t know how it is going to be
differentiated.” (E).
“I think it has been discussed but we don’t see thewill to do that. People are not willing to leavethat hold of power where you can influence thegranting of licenses from the Energy commissionor any other because obviously if you don’t have‘connections’ it is difficult to get a license inGhana if you don’t have a push backing fromthe political side, there can be noise about it butyou are not going to get a license” (D)
Stakeholders in favour and against potential policy
Support
Oppose
Positio
n o
n P
olic
y In
te
rve
ntio
n
PUWU
PURC
(GOV)
KITE
KASA
(CSA)
IGGS
KfW Dev’t Bank
(FINANCE)
MiDA
Solar Light
(Private)
Establishment of a competitive off-taker
market in the power sector
AGI
IGC
(Academia)
PURC
(GOV)
GIPC
Co
alitio
n
Gro
un
d
Alte
rnative
in
te
rve
ntio
n
Creation of good regulatory environment
FAULTY POWER SECTOR REGULATION CONSTRAINTChallenges related to Ghana’s power sector
regulation landscape undermine RE investors’ confidence.
Potential policies to address this constraint:1. Establish a full-time high level IPP
facilitator in the power sector. Implementation limited due to:
Extra cost dimension
“Negotiation for PPA cannot be doneby somebody else. It is the investorhimself that should do the negotiation.So, that I believe will be out of theequation. Again, when it comes to theenvironmental impact assessment, Ibelieve the investor should beinvolved. We can have that for someof the processes but there are someothers that the investor himself willhave to be involved in” (A).
“Is it even necessary if we have the energy commission todeliver that? That is going to be another cost on theprocess, because EC will still be there to regulate thesector which we are paying them for. Another body willalso be charging for accessing their services and that alsobecomes another cost on the deployment of thetechnology. I don’t think it is too big a role for the EC todeliver. But I think the energy commission is not alsothinking outside the box to promote renewables” (D).
Stakeholders in favour and against potential policy
Support
Oppose
Position on P
olicy
In
tervention
PUWU
PURC
(GOV)KITE
KASA
(CSA)
IGGS
KfW Dev’t Bank
(FINANCE)
MiDASolar Light
(Private)
Establishment of a full time high level IPP
facilitator in the power sector
AGI
IGC
(Academia)
PURC
(GOV)
GIPC
Coalition
Ground
Alte
rnative
inte
rve
ntion
Enforcing and activating existing IPP facilitation
regulations/policies/strategies
…
2. Establishment of a reliable and transparent full-cost tariff pricing system. Implementation limited due to:
Unaffordable argumentElectricity regarded as a public good
“So we start from the perception of electricity as a public good. Then it means government has to have a hand in it… it means we the consumers also expect it to be cheap. You know, it’s a right. Clean water? Yes. Good health, access to health care? Yes. Electricity? Not necessarily” (F)
“…..if we don’t stop seeing the energy sector as a social service and treat it as business, we will run into this challenge. If you want to talk about social equity and how everybody has to have access, fine., but should not be treated as a public good” (C).
Stakeholders in favour and against potential policy
Support
Oppose
Po
sitio
n o
n P
olic
y
In
te
rve
ntio
n
PUWU
PURC
(GOV)
KITE
KASA
(CSA)
IGGS
KfW Dev’t Bank
(FINANCE)
MiDASolar Light
(Private)
Establishment of a reliable and transparent
full-cost tariff pricing system
AGI
IGC
(Academia)
PURC
(GOV)
GIPC
Coalition
Ground
Alternative
inte
rve
ntion
Automatic tariff adjustment system devoid of government
intervention
No coalition!!!
…
3. Full implementation of the RE Act (Act
832) and its enshrined subsidiaries.
Implementation limited due to:
Non-incentivizing approach to RE
development
“…..countries like the UK and the US,
they never went straight through the
market route where you allow the
market forces to determine the place
of renewables. There were incentives
mechanisms through the FiT with the
obligation to pay. We cannot do
otherwise because our scenario is
even more complicated” (C).
“Some investors have challenges with the
feed in tariff. Some people say I am bringing
solar with modified technology and you want
to give me the same price as somebody who
is using ordinary solar panels. If I am
providing backups or storage, would it be the
same price as somebody who is just feeding
into the grid and when the sun is down he is
down? So those are the issues” (B).
Stakeholders in favour and against potential policy
Support
Oppose
Position on P
olicy In
tervention
PUWUPURC
(GOV)
KITE
KASA
(CSA)
IGGS
KfW Dev’t Bank
(FINANCE)
MiDASolar Light
(Private)
Full implementation of the Renewable
Energy Act (Act 832)
AGI
IGC
(Academia)
PURC
(GOV)
GIPC
Coalition
Gro
und
Alte
rnative
inte
rve
ntion
Remove/reduce taxes on RETs equipment for
commercial and household use
No coalition!!!
LACK OF ACCESS TO APPROPRIATE FINANCE
A fundamental factor underpinning the lack of appropriate
finance in Ghana and thereby affects renewable energy
investment is
Low financial portfolio of domestic banks.
This puts banks at risk if they give out the type of huge
credits that are needed by investors to undertake
investment in renewable energy
High interest charges on credit facilities and the inability of
domestic banks to undertake long term financing are mostly
as a result of macro –economic risk such as inflation
Stakeholders in favour and against potential policy
Support
Oppose
Position on P
olicy In
tervention
PUWU PURC
(GOV)
KITE
KASA
(CSA)
IGGS
KfW Dev’t Bank
(FINANCE)
MiDASolar Light
(Private)
Establishment of RE financial instrument within
domestic banks with lower interest rate
AGI
IGC
(Academia)
PURC
(GOV)
GIPC
Coalition
Gro
und
Alte
rnative
inte
rve
ntion
External fund sourcing through loans, grants and Climate Change
Funds
No coalition!!!
CONCLUSIONS
Key interventions to achieve full implementation of potential policies
Constraint Potential Policy Interventions
Off-Taker
Risk
Privatization of the
revenue arm of the power
sector.
Encourage broad consultation and also make it reflective of the
country needs.
Undertake proper sensitisation about the need for the
implementation of the policy.
Improved management of
ECG including revenue
collection (especially
revenue from debtors –
government and others)
Government willingness to eliminate subventions and interference
from the sector
Encourage the development of comprehensive plans and strategies
even before soliciting for financial aid especially, from donor
organisations.
Establishment of a
competitive off-taker
market in the power
sector.
Political will to create the enabling environment for public, private
sector participation to address the resource constraint of
government.
Embrace knowledge and technology diffusion
…
Constraint Potential Policy Interventions
Faulty
power
sector
regulation
Establish a full-time high level IPP
facilitator in the power sector.
Strengthen the Energy Commission of Ghana to become more
autonomous and independent.
Establishment of a reliable and
transparent full-cost tariff pricing
system
Eschew public good ideology created by politicians and
promote energy efficiency programmes especially at rural areas
to address affordability concerns.
Full Implementation of the RE-Act
and its enshrined subsidiary
instruments (Net-metering, mini-
grid systems, and the RE fund and
levies)
Promote and implement findings of local research that unearth
better ways to implement subsidiary instruments such as net-
metering, mini-grid and Feed-in tariff.
Synchronization of all energy policies to determine how
renewable energy will be rollout to eschew political favouritism
against renewables.
Lack of
access to
appropriat
e finance
Establishment of RE financial
instruments within domestic
banks by Government with lower
interest rates
Strengthening fiscal and monetary instruments in the country
to reduce policy rates given to domestic banks and
subsequently curb high interest charges on credit facilities.
